The divergence between the ISM non-manufacturing report and the PMI services report widened considerably today.
The non-manufacturing ISM index rose from 52.9 to 56.5 but the PMI services index rose from 51.3 to 51.4.
At least one of these measures portrays a considerably wrong picture.
Bloomberg Econoday Paints a Rosy Picture
ISM’s non-manufacturing sample is reporting its strongest rates of growth of the year, headlined by a big 3.2 point jump in the composite index to 56.5. New orders are even further above break-even 50 at 59.9 with new export orders up 4 points to 53.0. Employment is also up, 3 points higher at 52.7 in a reading that hints at sizable improvement for Friday’s employment report.
Deliveries are slowing which is a sign of rising demand and inventories are rising in what perhaps hints at restocking and new confidence in the outlook. Business activity, which is a measure of production, is also very strong, at 59.5 which points to strength for the June economy. To keep production up in the month, the sample worked down its backlogs which are in contraction for the first time in more than a year. But the rise in new orders should help fill backlogs back up while the strength in exports underscores global demand for the nation’s technical and managerial services.
This report historically is not volatile which makes June’s gains impressive. The bulk of the nation’s economy may very well be picking up steam heading to the Brexit fallout.
Compare the above comments from Bloomberg Econoday to the the Markit Services PMI.
Markit U.S. Services PMI™ – Final Data
Markit reports “Marginal expansion of U.S. service sector activity in June, while jobs growth eases to 17-month low.”
Key Points
- Service sector growth remains weaker than post-crisis trend
- New business expands at fastest pace since January
- Business confidence drops to a fresh survey-record low
Markit Services PMI
Markit Composite PMI
Comments from Chris Williamson, Chief Economist at Markit
- “Rebound, what rebound? The final PMI numbers confirm the earlier flash PMI signal that the pace of US economic growth remained subdued in the second quarter.”
- “While volatile official GDP numbers are widely expected to show a rebound from a lacklustre start to the year, the PMIs suggest the underlying malaise has not gone away. The surveys point to an annualized pace of economic growth of just 1% in the second quarter.”
- “Service sector confidence has slumped to the lowest since 2009 alongside ongoing woes in the energy and manufacturing sectors, as well as worries about the outlook amid presidential election uncertainty.”
- “Hiring has also slowed, though remains surprisingly upbeat. The surveys signal non-farm payroll growth of 150,000 in June, suggesting many companies expect the slowdown to be short-lived.”
Diffusion Index Discussion
Both of these reports are diffusion indexes.
The problem with diffusion indexes is they only measure direction, not quantity. A small company reporting an increase in 5 jobs will balance out a larger company firing 500.
The same applies to export orders. Three small companies reporting small increases in export orders will more than balance out two large companies reporting large decreases in export orders.
Also a set of companies reporting tiny (almost meaningless) rises in exports could cause such a jump.
Which Report to Believe?
It’s possible the answer is in the middle, but even that does not fit in with weak data in recent reports.
I side with Williamson and his beliefs on subdued growth.
Mike “Mish” Shedlock
